A Tax By Another Name

It would appear that Congress has finally done its job and will pass a budget. The House passed the legislation last week before adjourning for the holidays while the Senate will do so this week.  While we might hail the bipartisan effort to avoid another government shutdown for the next two years, there are still many problems with this budget deal.  Though I could write an article on the hits and misses of this new budget deal, I’ve decided to focus on one particular part of it.

The budget deal eliminated $45-billion in sequester cuts (equally on military and non-discretionary spending) that were set to take place at the beginning of 2014, and also another $18-billion that were set to hit in 2015.  Sequester cuts were left in place beyond 2015.  To help make up the loss of this money, they needed to get additional income, and that comes in the form of an increase in airline fees.  Specifically, it targets the 9-11 security fee.

taxes(4)

Currently, the 9-11 security fee is $2.50 for a nonstop flight and $5 for a flight with stops.  There is also a cap at $5 so that a consumer cannot get charged more than that.  The new budget increases the fee to $5.60 regardless if it is nonstop or not and eliminates the cap.  It also takes the money generated out of its own account where it can only be spent in certain ways and places it in the general fund.  This allows Congress to spend the additional revenue wherever it sees fit.

And while you might think to yourself that $2.50 or even $5.60 might not seem like a lot, it’s because you haven’t taken into account the rest of the taxes and fees that are associated with that ticket.  A $700 plane ticket might have almost $200-worth of taxes and fees in the price.  When you start adding up all the “little” taxes and fees, you suddenly realize that you’ve been “nickled-and-dimed” out of a lot more.

So what exactly are all the taxes and fees that are included when you by a plane ticket? (per person)

  • Domestic Passenger Ticket Tax: 7.5% of the base ticket price.
  • Flight Segment Tax: $4 per connection (this increases $0.10 each year)
  • International Travel Tax: $17.20 which is a departure and arrival tax
  • Passenger Facility Charge: $4.50… airports have been wanting this increased
  • September 11 Fee: Currently $2.50 and will be raised to $5.60

Those are some of the bigger taxes and fees, but there are still lesser ones that add to that ticket price.

  • Frequent Flyer Tax: 7.5%
  • Cargo Waybill Tax: 6.25%
  • Commercial Jet Fuel Tax: $0.04
  • Aviation Security Infrastructure Fee: Varies
  • APHIS Passenger Fee: $5
  • APHIS Aircraft Fee: $70.75
  • Customs User Fee: $5.50
  • Immigration User Fee: $7.00

And just like with all of these other taxes and fees, the increase in the 9-11 security fee will be passed on to the consumers despite the billions in  profits of the major airlines and the already high costs of a plane ticket.  In an article on The Hill, Delta Airlines CEO Richard Anderson stated that he would be doing just that… passing along the increase to the consumer.  According to the Memphis Business Journal, Delta Airlines profits increased 18% in 2012 to $1-billion.

Airlines want more people to fly but yet they continue to raise prices for whatever reason they come up with… which does include when the government includes a tax on them.  As prices rises, more and more people are not able to afford the ticket prices and are therefore left out.  In 2007, a ticket to London could cost about $750.  That same ticket in 2013 cost about $1500, per person.  There will be cost of living increases during that time, but not to the point that it doubles prices.

Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) have repeatedly said that the new budget does not raise or include new taxes.  Though that may be true in terms of income taxes, they apparently aren’t counting the increase in the 9-11 security fee.  Just because something is a fee doesn’t mean that it’s not a tax.  A fee is a tax by another name.  So yes, this budget does increase taxes.  They should have just let the sequestration cuts stay in place and just allowed the different departments to structure the cuts how they wanted.  There is enough waste in the budget as it is to accommodate the minuscule amount of cuts that the sequester had in place.

SOURCE:
Taxes and Fees provided by MarketWatch and Airlines.org

The Fair Tax: Is It Fair?

What is the Fair Tax… other than the Libertarian platform for tax reform?  According to FairTax.org, “The Fair Tax Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, repeal of the 16th Amendment.  This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax.”  It sounds like a lot, but it is a relatively simple idea… and one that could possibly simply by the tax codes.

We all know that the federal government needs taxes in order to pay for things.  Up until the passage of the 16th Amendment almost 100-years ago, the government collected its tax dollars from alcohol sales.  But since the amendment’s passage, it’s been income taxes, which have become more and more complex over time.  In 1913, there were only 400-pages of federal tax codes, regulations, and IRS rulings.  Today, that number has grown to 73,608-pages.  And the compliance burden on the taxpayers to pay their taxes correctly is costing us $431.1-billion a year.  This can be broken down into Time Value Costs ($377.9-billion), Direct Outlays ($31.5-billion), IRS Administrative Costs ($12.4-billion), and Comprehensive Tax Audits ($9.3-billion).  So basically, we are spending 30% of our tax dollars just to pay our taxes.  The Libertarian Party’s approach is to simplify all of this by abolishing all federal income taxes and replacing it with a simpler federal retail sales tax.

With the Fair Tax, people would take home 100% of their paychecks… except where state income taxes apply.  It would establish a uniform tax across the board on all new items at 23%.  Why 23%?  At that level, it’s becomes revenue neutral.  The government takes in exactly what it is taking in now.  A large argument against such a tax plan is that it would favor the wealthy over the poor as the poor already have trouble being able to afford items.  This is solved though by a monthly prebate that all American citizens (those with Social Security cards) would receive to cover the tax spent on necessities up to the federal poverty level.  A single person would receive a monthly prebate of $199.  A 2-adult, 2-children household would receive a monthly prebate of $537.  (Numbers based on the Department of Health and Human Services 2008 Poverty Guidelines)  And also note that I’ve been saying that the Fair Tax only applies to new goods.  That’s because you would not be paying the tax on used items as they were already taxed once before.  So if you bought a used car, a used house, use clothing, etc., there would be no federal tax at all.  It’s only applied to new goods and services, and it can only be charged one time… right when you make the purchase.

Did you know that when you buy something, that you are paying for the company’s corporate taxes plus their compliance costs?  Corporations have to pay payroll taxes and make contributions into Social Security and Medicare.  All of this is passed along to the consumers at a higher price.  With the Fair Tax, corporate income taxes would be abolished, too.  No longer would corporations have to hide these taxes in higher retail prices.  Prices are allowed to drop then without revenue or profit being affected.  This could allow a company to employ more people.  And before you start thinking that corporations don’t pay taxes under the Fair Tax, FairTax.org states, “Corporations are legal fictions that have not, do not, and never will bear the burden of taxation.  Only people pay taxes.  Corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors.”  And when it comes to jobs and exporting/importing goods, “the Fair Tax does not burden U.S. exports the way the current income tax does. The Fair Tax removes the cost of corporate taxes and compliance costs from the cost of U.S. exports, putting U.S. exports on a level playing field with foreign competitors. Lower prices sharply increase demand for U.S. exports, thereby increasing job creation in U.S. manufacturing sectors.  At home, imports are subject to the same Fair Tax rate as domestically produced goods.”

So what about Social Security and Medicare?  They come out of our paychecks.  Our tax dollars specifically pay for them.  They actually stay the same… maybe coming out a bit ahead.  Instead of the money coming from our paychecks, they come from the tax dollars on the new goods and services we buy.  Spending by Americans is usually more constant than income levels.  Currently, Social Security and Medicare funds are taxed three times: 1) when payroll taxes are initially withheld, 2) when those withheld payroll taxes are counted as part of the taxable base for income tax, and 3) when the promised benefits are finally received.  This would completely negate all of that until you spent it on some new good or service.  And with the Fair Tax, both programs would have a wider base participating in the program… which, if you think about it, would include all members of Congress.

So are there any countries today that use this type of taxation?  The simple answer is no though the states of Florida and Texas use a similar system for their state taxes.  However, in England after the defeat of Napoleon, did repeal its income taxes and had major economic gains which only stopped with the re-imposition of the income tax.  Now what about state sales taxes.  States will have the choice to participate or not… meaning they can keep their current state sales tax on items or they can choose to go to the federal sales tax, in which they would receive a fee for their participation that would take the place of their state sales tax.  They cannot do both.  And with the IRS gone, who collects the taxes?  Pretty much everywhere you buy things… just like they do now with state sales taxes.  In the end, you get to determine how much you pay in taxes by how much you spend on new goods and services.  This is also the only plan that calls for the full repeal of the 16th Amendment, though even without it, there would still not be a federal income tax and a federal sales tax.  The 16th Amendment only gives Congress the right to tax our income, but it doesn’t state that there has to be an income tax.

I want to close with a few examples from FairTax.org.  This might help in seeing how this would affect us all.  Under our current income tax system, let’s say that you earn $100.  You get to keep $77, so your income tax rate is 23%, and the government keeps $23.  Now let’s move to the Fair Tax.  You again earn $100.  You get to keep $100, and you choose to spend $77.  Your Fair Tax rate is 30%, and the government only gets $23.  Now that was based just on an individual.  Now let’s look at different income levels and how they are taxed under the Fair Tax.  Let’s say a billionaire (who is married with no children) spends $10-million and pays a tax of $2.3-million.  He gets a prebate of $4,697.  His tax rate is 22.95%.  Now let’s look at a couple with no children that spends $50,000.  They pay a tax of $6,803.  The prebate check would be the same as the billionaire’s at $4,697.  Their tax rate would be 13.6%.  For a quick comparison to today’s income taxes… that same couple that would earn $50,000 would pay a total of $7,918 in taxes (income and payroll taxes).  Their tax rate would essentially be 15.8%.

There is a lot of information on the Fair Tax… far more than I can get into.  The website does a fairly good job of breaking it all down and making it easy to understand.  Whether you are leaning for or against it, I highly encourage everyone to go to the site and look over the details.  It may even answer some questions you might have that I haven’t addressed.  This was only written to be a summary and to be a brief introduction… not an endorsement.  So check it out and feel free to leave feedback below.  There will also be some added shortcuts linked below, too.

SIDENOTE:
All quotes are from FairTax.org unless otherwise stated.

LINKS:
Thumbnail Sketch of the Fair Tax with FAQ (pdf)
Income Tax vs. Fair Tax vs. Flat Tax (pdf)
The Fair Tax and Business
How Fair Tax Works

A Taxable Penalty

Is it a tax or is it not?  The Supreme Court has said yes and thus is constitutional.  In 2009, President Obama said that it wasn’t repeatedly.  Republicans said that it did not fall under the Commerce Clause for the Congress to pass such legislation, and therefore, wasn’t constitutional.  There have been so many different angles coming at us these past couple of days over the Affordable Care Act (“Obamacare”), that one’s head might start spinning in circles if it came to making sense of any of it.

President Obama did in fact say in 2009 on “This Week with George Stephanopoulis” on ABC that the Affordable Care Act wasn’t a tax.  Democrats in Congress even made the same point.  But that came down to semantics.  The word used throughout the legislation was ‘penalty,’ and it only applies to those that don’t have health insurance.  Knight professor of Constitutional Law and the First Amendment at Yale Law School, Jack M. Balkin, wrote the following in an op-ed for CNN:  “If the Affordable Care Act imposed a mandate, it was ordering people to buy insurance, and nobody likes to be told what to do by the government. But if it was a tax, then it actually gave people a choice: Pay a small tax, or buy health insurance.”  Republicans like to make the charge that the Affordable Care Act is government-run/socialist healthcare, and they’ve managed to stick to that message and get people worked up over it (hence how we now have the Tea-Party wing of the Republican Party).  Most First World nations (and others) actually have government-run/socialist healthcare, and one should go look those countries up before making such a claim here.  So here is my question to this.  How is the Affordable Care Act government-run/socialist healthcare when people still have the right to choose which healthcare provider and plan they wish to go with?  The government isn’t forcing us to buy healthcare from itself since there is no public option.  For those on Medicare and Medicaid, which are government run healthcare programs, this law doesn’t really concern them.  It also doesn’t affect those with company healthcare.  It mostly goes after those that buy healthcare on their own… whether they choose to or have to.  It does have far bigger reaches such as covering pre-existing conditions, covering dependents until they are 26, etc., etc.  (click here for more information)  If one were buying individual health insurance, they will now be able to enter into an exchange that will allow them to be like a company with bigger numbers for better prices rather than just being one person.  It’s often the lone individual that gets stuck with higher premiums.  The consumer still gets to choose which health insurance they wish to purchase or even choose not to and pay the penalty.

“The Congress shall have power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; […]” Article I, Section 8 of the US Constitution

So now that it has been determined that the Affordable Care Act was essentially taxing people that didn’t have health insurance (despite the term ‘penalty’ being used), it now just needed to justified by providing for the general welfare.  In the end, five justices of the Supreme Court ruled that it did and therefore fell under the powers of Congress.  Again, I go back to the op-ed on CNN from Jack M. Balkin…

“The answer to that question was also pretty clear. Congress wanted to give all Americans a new set of consumer protection rules that prevented insurance companies from denying coverage for pre-existing conditions and imposing lifetime caps on coverage. The only way to make those reforms work, Congress thought, was to get more people in the national risk pool. Hence, Congress decided to give uninsured people a nudge instead of a direct order: It taxed them if they didn’t buy insurance.”

With the Supreme Court ruling, the Affordable Care Act is now the legal law of the land… despite where any of us stand on the issue.  The only way it can be repealed is by an act of Congress… which Republicans are trying to do.  Presumptive Republican presidential nominee Mitt Romney and other Republicans are saying that Affordable Care Act will add trillions to the deficit.  This has been rated as False by Politifact.  They went to the non-partisan Congressional Budget Office for their official numbers.  The CBO said that with the passage of the legislation, it would lower the deficit by $124 billion over 10-years, and that repealing it would increase the deficit by as much as $210-billion over 10-years.  The CBO isn’t perfect with it’s calculations.  It even admits that it’s hard to predict future numbers since there are many variables that can make them go up and down.  There is one additional stipulation.  These numbers were crunched before the Supreme Court ruling, which did make one decision that could affect them.  The court ruled that though the federal government could give the option for states to accept (or not) the new Medicaid funding, the federal federal government could not withhold all Medicaid to the states if they refused… that it could only withhold future payment increases, but not what was already agreed to when the federal government and the state governments entered into the Medicaid program.  The CBO is currently crunching the numbers to see how the ruling will affect the overall numbers.

The Democrats, and President Obama, celebrated the ruling on Thursday while Republicans fussed over it.  And though the moods were celebratory on the left, I’m quick to remember that nothing energizes the right more than “Obamacare.”  This November will be the endgame.  If the Republicans can’t win the presidency and both houses of Congress by big enough margins, then the Affordable Care Act will be here to stay.  Only time can tell if the legislation will go down as a triumph or a failure… no matter how November goes.  In the past, we’ve seen bad legislation be popular and good legislation be unpopular.  For now, the shock is wearing off, and voting populace is turning now to more pressing matters… jobs and the economy, despite Republican efforts to keep healthcare at the top.  It’s hard to say how this will play out in the years to come, but it will take an educated populace to get through all the partisan rhetoric.

“You can fool all the people some of the time and some of the people all the time, but you can’t fool all of the people all of the time.” Abraham Lincoln~

SIDENOTE:
According to a new Gallup poll, Americans are evenly divided as to whether they agree with the Supreme Court decision 46% to 46%.  Approximately 80% of Democrats agree compared to 45% of Independents and 13% of Republicans.

LINKS:
Washington Week (PBS) – Friday, June 29, 2012

Trickle-Down

Who was paying taxes in 2009...

Taxes have been all over the news as of late… pretty much since the debt-ceiling debate (not including last year’s debate over the Bush-era tax cuts), so I decided to give it a go because of some things that have recently come out to stir the pot on this hot-button issue.  So let me start at the end of 2010 with the debate on the Bush-era tax cuts.  Everyone wanted them extended.  The major differences… the Democrats wanted to end the tax breaks on the wealthiest 2% of Americans and Republicans wanted them made permanent.  The tax breaks were continued for all for a couple of years in the end.  Now let’s fast forward to the debt-ceiling debate.  By this time we have a whole new Congress in place.  The House is controlled by the Republicans (with the Tea-Party Republicans) and the Senate controlled by the Democrats.  President Obama wanted originally just a plain bill to raise the ceiling like had been done before for several administrations.  But the Tea-Party Republicans screamed foul and wanted budget cuts.  So the President went along with that and shot for a $4 trillion cut in spending.  This was to be done by cuts across the board, reworking Social Security and Medicare to be more solvent, and by ending the Bush-era tax cuts to the wealthiest 2% of Americans.  This died quickly as the Republicans stood their ground by repeatedly saying “they would not raise taxes on anyone.”  The deal was reached with just budget cuts and a plan to cut more… but there was no reworking of entitlement programs and no end to the Bush-era tax cuts.  The Republicans and the Tea-Party remained adamant that taxes for any person or any corporation should not increase.

Let’s skip ahead to the past week and the op-ed in the New York Times by billionaire (and one of the world’s richest people) Warren Buffett who was basically screaming at Congress to stop coddling the super-rich and to tax them more.  Yes… someone was telling Congress to tax them more.  And this isn’t the first time Buffett has told Congress this.  They just don’t know how to listen very well.  Buffett paid about 17.4% in taxes last year; whereas, the other 20-people in his office paid between 33-41% in taxes.  How is this so?  Tax-loopholes and the fact that most of his money comes from his stocks/investments… capital gains.  Buffett is mostly screaming for the top 1/2 of 1%… the rich of the rich or the cream of the crop so to speak.  And his arguments have hit a chord amongst the average person.  In fact, the day it appeared, it was the most retweeted thing on Twitter.  Why?  Because the average person believes the rich (especially the super rich) get off more easily and they are having a harder time just trying to make ends meet, and what Buffett said reinforced that belief.

So did Congress hear anything yet… “That the wealthy are being coddled and have it the best they’ve ever had”?  To a degree… and to a lesser degree, at that.  Republicans in Congress have no hinted that they may approve an increase in taxes.  But not to the degree of what Buffett was writing about or to what the Democrats and President Obama have wanted.  In fact, the likely tax increase will be opposed by all of them.  Why?  Since the beginning of 2011, there has been a tax cut in place off our paychecks… a payroll tax cut.  It is only good for this year and expires at the end of the year.  This has put on average $1000 extra dollars into the pockets of hard-working, average, everyday Americans who are just trying to pay the bills and keep the economy somewhat chugging along… even if it appears to be limping at present date.  The Republicans have stated that they want the payroll tax holiday to end at the end of the year and thus increasing taxes on those of us who are working and trying to make ends meet in a slower economy.  After fighting tooth and nail and screaming that there was to be no tax increase at all period, they have now done an about face and want to tax not the people that can easily afford it but those that can’t.

2011-2012 Tax Revenue

Of course they have their reasoning for this, too.  The rich, with their extra money from tax cuts, will use that money to help investments and by getting people back to work, etc. etc. etc.  Basically the same sticking points the argument has always been for tax cuts for the wealthy.  And this should all sound somewhat familiar to those that are old enough because it’s very similar to the theory of trickle-down economics of the Reagan years.  The problem is that we have proven since then that that didn’t work.  And to make the case again now is completely ridiculous because the rich have had this money since the Bush-era tax cuts were put into place almost 10-years ago, and I haven’t seen any investment or anything trickling down at all.  They aren’t investing in our economy or creating jobs.  They are sitting on that money and making more money off it… the same as they’ve always done with it.  This is why the gap between rich and poor has gotten so much wider.  And this is also why the middle-class gets hit with tax after tax after tax.  The Republicans have also been arguing that the Bush-era tax cuts, which again I remind my readers that they were done almost 10-years ago and will again come up for a vote next year, were meant to be long-term and continually renewed; whereas, the payroll tax holiday was only meant to be temporary and therefore shouldn’t go past the end of the year as it was set up.  Sound like a twisted answer?  Allow taxes to increase on those that can’t afford one, but keep everything in place for those that can.

Tax reform is desperately needed in this country.  These short-term solutions aren’t going to cut it.  And yes, the Bush-era tax cuts are considered short-term solutions though the Republicans want to make them permanent for everyone.  And like anyone, I like keep more of my money that I earn… and was happy for the tax cuts, except I saw through the smoke and mirrors.  (And if I did write about the Bush-era tax cuts, it probably would have been on a different blog.)  He’s letting me keep more of my money (or in the case of the initial stimulus that was pre-Obama, when the government was sending out rebate checks), but at the same time, the administration didn’t cut spending so it was still spending the money that I then had in my possession.   What does that mean?  It means that I would have to pay it back with interest.  The long-term picture of this was not on anyone’s mind.

I do agree with Republicans on a key point (and it will probably shock most of my friends when they read this).  Corporate taxes should not be increased… and this does include energy companies.  My reasoning is based on simple economics.  Companies (especially energy companies) are making big profits.  The average person wants the energy companies to be taxed more to help bring in revenue (since most of us realize that spending cuts aren’t going to do anything unless the federal government can get added revenues somehow).  But there is something that is being overlooked.  Energy companies are businesses, and they aren’t going to allow higher taxes to take away more of their profits.  They’ll just raise the rates as to what they charge us as the average consumer, and their profit margins will be just fine.  Unfortunately, it will be costing us more in the long-term because we would be paying more.  This is one of those cases where it sounds great on paper but in reality, it just won’t work out that way… especially in the current state of our economy.

So what are the options for tax reform?  We are getting close to an election year, so we are going to be hearing a lot of hype about our tax system from all the candidates.  Republican candidates are espousing permanent extension of all the Bush-tax cuts (even for the wealthiest 2%) but also pushing for flatter tax brackets.  Their plans might not be a complete flat tax, but flatter than what they currently are.   The other week, I was having a nice dinner with a friend that I hadn’t seen in a couple of months when we started talking about this, and he brought up an interesting idea… more tax brackets than there currently are so that a person’s income is more proportionately taxed rather than being these bigger brackets.  It’s an idea I hadn’t even thought about.  I don’t mind paying my fair share… but the key word in that is “fair”.  I will agree that tax loopholes need to be closed and will agree with Warren Buffett that the wealthiest need to pay their “fair” share and not have everything come down on me, the average working man.

So in leaving you with all of this to ponder, I have a few questions for your opinions.  Should the payroll tax be extended at the end of this year, and are Republicans being hypocritical by threatening to allow them to expire?  Should the Bush-era tax cuts be extended next year for everyone, for some, or shall they go away?  What are your opinions on the flatter-tax brackets idea that the Republicans are talking about and what are your opinions about the idea of more tax brackets that might tax your income more proportionately than the current system does?  And my final question… what are your overall ideas on revamping and overhauling our tax codes?  Leave your opinions below.

LINK:  Warren Buffett’s op-ed piece from the New York Times

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